CB RICHARD ELLIS
MarketView
www.cbre.bh/bh_en/research
Hot Topics
•GDP growth forecast to be around 4%
in 2010 with inflation stabilising at
around 5%.
•The creation of employment
opportunities for the rapidly growing
Saudi population is an increasingly
pressing issue.
•The failure to agree and issue the new
mortgage law continues to stunt the
development of mid to low-income
housing throughout the Kingdom.
•Despite the lack of finance, land
speculation activity throughout the
Kingdom is forcing construction costs
higher and this is being passed directly
to buyers.
•Each of the three main commercial
centres is displaying widely varying
characteristics with respect to office
demand.
•The demand for top quality office space
in Riyadh far exceeds that of Jeddah
and Eastern Province which remain
dominated by price-sensitivity.
a
Kingdom of Saudi Arabia
OVERVIEW
At the end of the first half 2010,
Samba Financial Group reported that
GDP growth in the Kingdom is forecast
to be around 4% in 2010, with annual
inflation predicted to be reasonably
stable at 5% by year end.
However, even this level of growth,
which has been supported by stimulus
programmes worth over US$400
billion, may not be enough to fully
address the socio-political structural
issues in the Kingdom.
The most pressing issue is the
Kingdom’s demographic structure
which, when combined with an
increasingly unemployed population
has the potential to spill over to result
in a generally disaffected younger
generation.
Around 60% of the Saudi population is
under 20 years old and not
unreasonably this group is increasingly
seeking employment. With only
around 2 million Saudi nationals in
employment at present, the challenge
of finding employment for another 4
million by 2020 is significant.
Despite this, in 2009 the stimulus
provided by the need for housing,
offices and other infrastructure resulted
in a surge in employment for
expatriates in Saudi Arabia albeit
mostly in the low-income category.
Population Pyramid, Kingdom of Saudi Arabia - 2009
65+
60-64
55-59
50-54
45-49
40-44
35-39
30-34
25-29
20-24
15-19
10-14
5-9
0-4
2.50 2.00 1.50 1.00
Source: Nation Master
H1 2010
The Ministry of Labour announced that
an additional 1.5 million workers
entered Saudi Arabia in 2009 with the
result that remittances abroad rose to
approximately US$20 billion during the
year.
The US$400 billion stimulus package is
focused on providing construction
opportunities in the short term at
projects such as Knowledge Economic
City and King Abdullah Economic City,
followed by white collar, office-based
employment intended for Saudi
nationals in the long term.
The problem with this strategy lies in
the Kingdom’s employment dynamics
which mean that expatriates accept low
manual sector wages much more
readily than Saudis, and the Kingdom’s
education system requires a substantial
reform programme in order that young
Saudis have the skills necessary for
white collar employment.
The “Saudisation” plan (a programme
which set a 10% minimum Saudi
employment target in private sector
firms) has failed to deliver the
necessary results and so the
Government has turned to a
controversial education system reform
process costing US$2.4 billion. This
faces strong opposition from clerics
who are resisting the moderation of
religious text that currently dominates
the curriculum.
Females
Males
0.50 0.00 0.50 1.00 1.50 2.00 2.50
©2010, CB Richard Ellis, Inc.
 CB RICHARD ELLIS

MarketView
Kingdom of Saudi Arabia
www.cbre.bh/bh_en/research H1 2010

OFFICE SECTOR

Riyadh This matches up with Riyadh’s general

northerly migration, the result of a
Quick Stats (Class A)
Riyadh is the only city in Saudi Arabia planned approach to future
Riyadh with international standard Class A development contained within the
Change from office space and this is contained within Arriyadh Development Plan which
Lease Rates Q2 Q1 a handful of buildings with several articulates the need for a
09 10 more under construction. decentralisation process resulting in
Office   new urban centres to the north and
Characteristically, the market has east.
Sale Prices Q2 Q1 historically been dominated by a high
09 10 degree of price-sensitivity, but in recent Excluding international quality space,
Office n/a n/a
years sentiment has shifted and there Class A office rental rates remained
has been a surge in demand for local reasonably stable in Riyadh during H1
Class A space which has not been met 2010 at around SAR1,500/m²/pa,
Jeddah Change from
by the Class B development that has while Class B rental rates fell slightly as
taken place in central office locations. a significant volume of new space
Lease Rates Q2 Q1
09 10
entered the market and local firms, the
Increased spatial requirements in the typical clients for Class B space, did not
Office   local Class A and Class B sectors have expand or reorganise during this
been driven by international service period.
Sale Prices Q2 Q1 providers in the last few years but the
09 10
appetite for space and the sizes Occupancy rates in the Class A and B
Office n/a n/a required have both reduced as sectors have fallen slightly during the
economic circumstances have changed. first half of 2010 as new space has
The absorption of Class A and B space exceeded take-up. With a significant
Eastern Province in 2009 in central areas came volume of new supply (around 400,000
Change from
predominantly from Government square metres) likely to enter the
Lease Rates Q2 Q1
09 10
Ministries. market by year end 2010, landlords
might be expected to reduce their
Office   The construction of much-needed rental rates in order to ensure that
business parks is finally taking place in vacant space is absorbed.
Sale Prices Q2 Q1 northern areas of Riyadh and office
09 10
districts such as the King Abdullah However, this process is not
Office n/a n/a Financial Centre which will ultimately guaranteed in Saudi Arabia where
offer between 700,000 and 800,000 once a rental rate is established in the
square metres of quality office space. psyche of landlords, it is difficult to
negotiate reduced rates even with
space lying idle.

Class A Office Rents, Riyadh, Jeddah, Al Khobar - 2010

Rental rates Vacancy

2,500 30%

25%
2,000

20%
SAR/sqm/pa

1,500
15%
1,000
10%

500
5%

- 0%
Riyadh Jeddah Eastern Province

a
Source: CB Richard Ellis

©2010, CB Richard Ellis, Inc.

MarketView Kingdom of Saudi Arabia

OFFICE SECTOR (continued)

Jeddah

Having fallen behind other regional centres in terms of office space development, new quality office supply in
Jeddah started entering the market during 2009, a difficult period for most other commercial centres in the region.
Recent additions in 2010 include international standard Class A space, which combined with the growth of local
Class A space amounted to over 20% of the total market in the year up to mid 2010. However, the market was
under-supplied with good quality space and absorption of the new space has been reasonably rapid, with virtually
no change in rental or occupancy levels.

Rental rates for local Class A space are now hovering around SAR1,100/sqm/pa and occupancy levels are close
to equilibrium at almost 90%.

The dynamics of office space development in Jeddah are difficult to gauge as there is no formal CBD within the
city and office development has migrated gradually northwards from the Chamber of Commerce area in the south
towards the airport and Obhur Creek areas in the north of the city.

Office developments tend to take place in a mixed-use context, typically comprising the upper floors of retail malls
on streets dominated by ground floor retail premises. This approach, although possibly accidental, lends itself to
sustainable urban development, with the impacts of rush hour traffic moderated by shorter journeys to a wider
variety of destinations. Parking is typically shared with the ground floor retail areas with the result that there is far
greater efficiency of land use - office users park during the day, and shoppers use the same space at night.

A number of local Class A office space developments scheduled for completion over the next year, are being
offered to the market on a strata title basis. However, the appetite for this offering is likely to be limited given that
few corporates prefer a strata title approach and investor/speculator’s sense of adventure has been significantly
dampened due to experiences in other parts of the region.

Al Khobar and Ad Dammam

The Eastern Province cities of Al Khobar and Ad Dammam, have historically lagged behind Riyadh and Jeddah in
terms of economic and physical development but the oil price surge of recent years has changed all this. The
Eastern Province has become a priority area with investment from international oil and gas entities stimulating
wider office space and residential requirements.

Similar to Jeddah, the two cities have no formal CBD and this leads to some confusion over the most appropriate
location for future development. With the two cities gradually merging into one, the local quality space is being
built in a form of “ribbon development” along the main highways that link the cities.

The office market in Eastern Province remains highly price-sensitive, with the result that even new commercial
office buildings immediately fall into the Class B category, both by finish, layouts and location. A large proportion
of office buildings are owner-occupied but not on a strata title basis. Office development is rarely in mixed-use
properties in the way that Jeddah offices are constructed but do share locations with retail malls, with office
buildings often interspersed with small retail malls on commercial streets.

The growth of oil-related industries in both cities stimulated demand for office space in Al Khobar in particular,
with the result that numerous starts were made around 2008 and these are being delivered in 2010. Now that
much of the heat has gone out of this sector with moderated oil prices, demand levels have eased and rental rates
have fallen by around 10% in the period between mid-2009 to mid-2010. Given the highly subjective nature of
office building categorisation and the variety of buildings by quality and location, we would define the local Class
A market as achieving rental rates in excess of SAR750/sqm/pa.

The top level of pricing in Al Khobar and Ad Dammam is around SAR900/sqm/pa. This rate falls some way short
of the top rates achieved in Riyadh and Jeddah, and vacancy levels are fairly similar at around 15%. In Eastern
Province, the upper quality space is faring better in terms of occupancy than the lower quality space in the “Class
A“ category.
H1 2010

Page 3 ©2010, CB Richard Ellis, Inc.

 CB RICHARD ELLIS

MarketView
Kingdom of Saudi Arabia
www.cbre.bh/bh_en/research H1 2010

RESIDENTIAL SECTOR

Despite growing demand for housing, the ongoing and well documented failure to
Quick Stats address the legal requirements of the Kingdom’s mortgage sector has resulted in a
slowdown in both lending and construction. The uncertainty arising from the recent
Riyadh Change from
announcement that the new mortgage law had been sent back to the Shura Council
by the Cabinet means that developers, who had been increasingly considering the
Lease Rates Q2 Q1 mid to low-income sectors will have to reconsider such projects.
09 10

Residential   There is no timetable for the resolution of the outstanding mortgage law
disagreements between the Shura Council and the Cabinet, but given that the issue
Sale Prices Q2 Q1 has been under consideration for more than a decade it is difficult to be optimistic
09 10 about an early resolution. The consequence of this uncertainty is that developers
Residential   cannot build the low-cost or “affordable” housing desperately needed by large
sections of the population when they know that this section of the population cannot
afford the finished products. When combined with high birth rates and rampant
Jeddah Change from land speculation activity which has driven up the cost of land often beyond its true
Lease Rates Q2 Q1
economic value, Saudi Arabia may be heading towards severe social problems.
09 10
HSBC recently reported that Saudi Arabia requires one million new homes by 2014.
Residential   The current stock of housing is estimated at around 4 million units which means that
in order to satisfy this projection, the Kingdom’s developers would need to build
Sale Prices Q2 Q1
09 10
20% of the total housing stock in just three years. Without the support of the
mortgage law, this is simply not going to happen.
Residential  
Riyadh

Eastern Province During 2009, global economic circumstances and the ongoing lack of available
Change from finance resulted in a small fall in residential sales both by volume and achieved
Lease Rates Q2 Q1 prices. Rental rates also reportedly dropped marginally which was largely the result
09 10
of belt-tightening by both the expatriate and Saudi population.
Residential  
With legislation precluding the sale of off-plan units without special permission and
Sale Prices Q2 Q1 consumer confidence in masterplanned projects on the wane anyway, satisfying
09 10 housing needs has fallen to small-scale developers who are unable to meet the total
Residential requirements of the market. This type of developer tends to focus on small numbers
 
of middle and upper-income units, with the result that requirements in all other
categories of housing remain unsatisfied.
Hot Topics
Despite the persistent lack of finance, the sheer pressure of population growth,
•Land speculation has driven up the increases in construction costs and the shortfall in development are likely to force
development costs of housing and this house prices slightly higher in Riyadh in the short term. If the mortgage law is
has been passed on to buyers. introduced and it satisfies the key issues, the availability of finance will also allow
upward movement on prices well before supply can outstrip demand.

• The failure to formulate and approve the Quality Villa and Apartment Sales – 2010 (SAR/m² built area)
new mortgage law is continuing to stunt
the market with developers unable to Villas Apartments

address the chronic shortfall in the low to

middle-income sectors. 900
850 850
800 800
720
700
650
600 600
SAR/pm

500
400
300
200
100

a
-
Riyadh Jeddah Eastern Province
Source: CB Richard Ellis ©2010, CB Richard Ellis, Inc.
MarketView Kingdom of Saudi Arabia

RESIDENTIAL SECTOR (continued)

Jeddah

Similar to Riyadh, rapid population growth and the lack of mortgage finance are combining to force residents into
overcrowded and unsuitable housing conditions with the situation worsened by the catastrophic flash floods that
took over 100 lives in late 2009.

Estimates of Jeddah’s population vary widely but it is thought to be around 3.5 million and the total stock of
housing units is thought to be around 700,000. However, for a number of reasons including obsoletion of poor
quality stock, the current shortfall in housing is estimated by the Jeddah Municipality to be around 300,000 units.
With the majority of this demand falling into the low and middle-income categories, there is no way this shortfall
can be addressed until the mortgage law is approved and finance freed up for the general population.

Fewer Saudi nationals are able to gain jobs in the public sector in Jeddah than they can in Riyadh, and having this
type of employment is one of the few ways individuals can gain a mortgage at present. As a result, the situation is
becoming more dire each year and looks set to worsen significantly before it improves. The shortage of housing
and increasing land costs have forced housing costs up over the last 12 months despite the lack of available
finance.

Eastern Province

Given that Eastern Province has historically been subject to much more subdued growth pressures than Jeddah
and Riyadh, mismatches in supply and demand for housing have been less apparent. The long-term lack of a
large, low-income, urban society has also meant that demand for low to middle-income has come from a
relatively small base. However, the mortgage law issue has resulted in a situation where developers have focused
on the middle to upper-income sectors to such an extent that some oversupply is becoming apparent. Effectively,
the residential dynamics are completely different from those of Riyadh and Jeddah and without the chronic
housing shortage sales prices have actually fallen since mid 2009 by around 10%.

Rental rates have remained stable during the same period and we anticipate that there will be little movement in
both sales and rental rates in the short term. Residential compound rates have risen in the past few years as
western expatriates employed in the oil and gas sector have moved to Eastern Province but now the initial surge of
relocations has taken place we also expect compound rental rates to remain stable in the short to medium term.

For more information regarding the MarketView, please contact:

Mike Williams
Senior Director and Head of Middle East Research & Consultancy
CB Richard Ellis
Ground Floor
Manama Centre
Government Avenue
PO Box 11370
Manama
Kingdom of Bahrain
t: +973 1655 6600
e: mike.g.williams@cbre.com

http://www.cbre.bh/bh_en/research

Disclaimer 2010 CB Richard Ellis

Information herein has been obtained from sources believed to be reliable. While we do not doubt its accuracy, we have not verified it and make no
guarantee, warranty or representation about it. It is your responsibility to independently confirm its accuracy and completeness. Any projections,
opinions, assumptions or estimates used are for example only and do not represent the current or future performance of the market. This information is
designed exclusively for use by CB Richard Ellis clients, and cannot be reproduced without prior written permission of CB Richard Ellis.
© Copyright 2010 CB Richard Ellis
H1 2010

Page 5
©2010, CB Richard Ellis, Inc. a